Panel: State needs more homegrown PE firms

GRAND RAPIDS — Private equity investors say they see activity increasing in the years ahead in Michigan, although the state could surely use more homegrown funds.

Activity will come through investments made in companies based in the state as well as those elsewhere that may use the capital infusion to move or set up operations in Michigan.

“We definitely see a positive momentum in the private equity activity in supporting the businesses here in Michigan as well as being able to expand businesses to Michigan. I think one of the things that we’ve had opportunities with is the out-of-state businesses that we see and developing a business plan to help them to expand into the state of Michigan,” Doug Kearney of Glencoe Capital said during a recent panel discussion on the state of private equity in Michigan. The event was organized by the West Michigan chapter of the Association for Corporate Growth.

“We’re sort of at an inflection point with just the general positive momentum we have over the next five years. It’s shaping up to be a very active private equity and venture capital market in Michigan,” Kearney said.

Chicago-based Glencoe Capital manages the $153 million Michigan Opportunities Fund that so far has put $110 million into eight Michigan companies, three of which are on the west side of the state.

Speakers at the ACG panel discussion drew a parallel between private equity and the venture capital industry in Michigan that has grown nicely over the years with the support of the state, generating more homegrown venture funds and an increase in out-of-state venture investors with a presence in the state.

Private equity could benefit with the same kind of focus, speakers said.

When examining an investment prospect in the state, “we rarely go up against another Michigan private equity fund,” Kearney said.

A lot of the state’s support for capital formation is “skewed heavily” to venture capital, said Michael Kell, principal for the Credit Suisse Customized Fund Investment Group that manages seven investment programs for the state.

“The metrics and progress in the venture world has really been astounding. There’s been tremendous progress in terms of fund formation, deals and whatnot in the venture world,” Kell said. “Where the state hasn’t been very supportive — and this isn’t meant as criticism — is they haven’t put a lot of dollars toward fund investments in private equity managers in Michigan.”

Mike Flanagan, manager for equity capital programs for the Michigan Economic Development Corp., agreed that state support has been tilted toward the venture capital arena.

“But to our credit, the state’s recognized early on that there were gaps in the credit market and they wanted to be proactive about that,” Flanagan said.

The MEDC is presently preparing a request for proposals for a research firm to analyze capital markets in Michigan “so we can kind of get a good footing on where we’re at and see the gaps in capital in this state,” Flanagan said.

“In terms of economic development, we’ve been kicking ourselves in the last couple of years as we’re realizing that a lot of research is coming out that shows the value of investing in second-stage businesses — generally, middle market or lower middle market operating companies with great growth opportunities and a need for capital that oftentimes are ignored by the senior debt markets. Or they’re just not able to get the kind of debt they need from the senior debt markets,” he said. “The indigenous private equity industry in Michigan is just not quite there yet, and the mezzanine market probably isn’t either. So we think growth in both of those areas — and they’re complementary, we think — is huge for the state going forward.”

Between 2000 and 2010, private equity investors put $40 billion into 415 deals in Michigan, which ranked 12th in the nation in the number of deals and 14th in dollar volume, according to data presented by Blackford Capital at the ACG event. Nearly 85 percent of the deals involved out-of-state private equity firms and capital.

Flanagan indicated that the state could do more to support private equity funds. Importing more capital to Michigan from outside the state “is great,” Flanagan said, “but I think helping create more indigenous funds is going to be important as well.”

“We do want more of the indigenous funds here to invest in Michigan,” he said. “It’s great that there’s so much private equity being imported from out of state, but I think from our perspective … we need to change that. We think funds that are located here will not only create a talent base of people in the industry, but it will also hopefully invest more in Michigan than they would if they were out of state.”

While a heightened emphasis could help, Credit Suisse’s Kell said the key for creating more private equity investment in Michigan — as with venture capital — is generating successful exits and returns for investors.

“It’s important to prime the system, but the key ingredient to success in the venture landscape is those excellent returns for their investors to compare favorably on any basis. If they don’t get there, you can keep priming the system, but you really need the exits,” Kell said. “We definitely feel we’re getting to that stage in the venture world. In the private equity world, we probably need to do more work.”